Stability is one of the most sought-after aspects of finance. It’s also extremely important for any business. Yet, it isn’t the first thing that comes to mind, especially with the topic of cryptocurrencies. However, this might change with the introduction of stablecoins.
Stablecoins are blockchain-based payment currencies that are devised to achieve price stability. This means that a stablecoin’s price is largely fixed with minimum fluctuations. However, most of them are experimental to a certain extent, and their use, apart from that in crypto exchanges, issuers and speculators, is somewhat dubious and limited.
The question is: with such limited use of stablecoins, how do they fit into our current payment system? And should businesses start considering them? The answer to those questions and the business benefits of stablecoins are depicted in this article.
What Are Stablecoins?
Let’s start with the absolute basics.
Stablecoins are cryptocurrencies that are pegged to another currency. These could be either fiat money or crypto. They are also used to exchange-traded commodities like precious metals or goods from industries. In other words, stablecoins are a form of cryptocurrency minus the volatility. They share all the traits that any regular crypto coin might have, but their value remains constant. In that sense, they are similar to traditional currencies.
One question that might arise is: how do stablecoins work?
Stablecoins are generally fiat-backed. This means that you use your fiat currency to buy a stablecoin. They function as an IOU (I owe you) for your traditional currency. You can further use these stablecoins to cash in and redeem your original money. Stablecoins, which are centralized, need a custodian to regulate the currency and reserve a certain amount of collateral. For instance, Tether uses the US dollar for this purpose and the amount they mint is always equal to the amount of money held to maintain the system. This is how fluctuations are prevented.
Aside from backed-stablecoins, there is another type of stablecoin called the Seigniorage-style. These coins are not backed and are utilized by an algorithm to maintain their supply. This means that no collateral is needed to mint these coins. Seigniorage-style stablecoins have less demand than their counterpart.
For someone who is new to cryptocurrency and is not well versed with blockchain technology, stablecoins are indeed a boon in disguise. Crypto is a highly volatile market. You can lose a lot of money if you don’t keep a close eye, or if you don’t know what to keep an eye on.
If you are new to this industry, it might be a smart choice to keep some of your digital assets in stablecoins. You can easily buy stablecoins from exchanges like BlockX. Stablecoins also come to your rescue when certain cryptocurrencies go into a recession period. These are called “bearish” trends. Stablecoins help mitigate your risk during such times by converting your digital asset.
However, if you are a trader, stablecoins might be of little to no use to you. This is because, as a trader, you would have to monitor the daily trends of cryptocurrency. You would also need to rely on a lot of ancillary data to monitor price hikes and drops. Thus, a coin with a fixed value would hardly be of any use.
Why Should Businesses Consider Stablecoins?
Many economists have claimed stablecoins to be safe, real-time, and cost-effective. In addition, they provide a cheaper alternative for businesses to accept payments. They also make it easier for the government to send stimulus money and operate conditional cash transfer programs.
In addition, they might help businesses in the following areas.
#1 For Payroll
While the use here is not very widespread, it is quite vouched for by many researchers.
Businesses use stablecoins to simplify their taxes and prevent themselves from volatility.
Employers use Stablecoins for employer/employee contracts and to make transactions between businesses. According to Gilded, a payments and accounting company for businesses, roughly 5.7% of its payments volume was USDT or USDC between January 2020 and March 2021.
#2 For Consumer Purchase
Stablecoin transactions have been growing in the past few years. As presented by BitPay’s statistics, last year in Q3, around 0.5% of the payments they processed for businesses were stablecoin transactions, while this year, this number has jumped to 2%. This shows a steady increase in the use of stablecoins.
#3 For Lending
Lending is the most widespread use of stablecoins. This is because stablecoins offer an interest rate that is higher than what most providers offer. When lending their stablecoins, investors can typically earn a base rate of roughly 8% compared to <0.1% on average if their money is maintained in a traditional bank deposit or savings account. As of June 2021, there is roughly $15B worth of stablecoins lent out through DAI, Compound, and Aave, all of which have shown a growth of over 400% since the beginning of 2021.
Conclusion — What is BlockX’s role in all this?
Apart from the said benefits, stablecoins offer relief to businesses in other areas. These include reduced conversion costs and reduced transaction fees associated with payment methods like credit cards.
According to the statistics, it is quite clear that businesses are shifting stablecoins due to their large array of benefits. Although stablecoin use is not yet widespread in business, there is a bright future in store for this coin.